Former MIT Sloan School of Management professor Gabriel Bitran and his son plead guilty to charges of running a fraudulent hedge fund investment scheme.

From 2005 to 2011, the two ran GMB Capital Management LLC. During the time, they raised over $500 million in funds to invest and took fees of $16 million, but ended up losing $140 million by placing investments in “funds of funds” and funds run by Bernie Madoff.

Christie Smythe of Bloomberg reports:

Ex-MIT Professor, Son to Plead Guilty in Hedge Fund Scam

A former Massachusetts Institute of Technology professor and his son agreed to plead guilty to running a $500 million hedge-fund scam that was uncovered by investigators probing Bernard Madoff’s Ponzi scheme.

Gabriel Bitran, who was a professor and associate dean at MIT’s Sloan School of Management, and his son, Marco, wooed investors to GMB Capital Management LLC with fake claims of success in managing family and friends’ accounts using a trading model based on the father’s research, according to a copy of a charging document provided by federal prosecutors in Boston.

The men, who raised more than $500 million from 2005 to 2011, meanwhile put money into “funds of funds,” which rely on investments by other hedge funds, and fed money to Madoff’s firm and Madoff feeder funds, according to prosecutors.

The Bitrans’ funds suffered losses of more than $140 million. The men paid themselves as much as $16 million in management fees over the life of the businesses and recovered $12 million of their own investments when the funds were doing poorly, the U.S. said, adding that the two discussed their scheme in e-mail exchanges.

“A person with experience and knowledge of the financial sector and a veteran professor of MIT should not have engaged in this type of behavior,” Gabriel Bitran said in an e-mail to his son in July 2009 that was cited by prosecutors. “I feel very embarrassed because we told them a story that was not true!”